7.8 Corporations Act 2001 (Cth)

The Corporations Act 2001 (external link) gives statutory force to many common law principles mentioned earlier in this Guide. It also imposes a number of additional fiduciary duties on directors of incorporated bodies. The Government has established a number of special purpose companies (incorporated under the Corporations Act 2001 (external link) ) which operate under the auspices of a number of departments. Reference can be made to departments' annual reports for details of these companies.

Those appointed as directors of these companies must have regard to the Corporations Act 2001 (external link) in carrying out their duties. Although persons who are appointed to Government Boards which are not companies are not specifically bound by the Corporations Act 2001 (external link), the duties discussed below parallel the general law duties to which Board members should adhere.

Under the Corporations Act 2001 (external link), directors are required to:

• act in good faith and for a proper purpose;
• act with care and diligence;
• avoid improper use of information;
• avoid improper use of position;
• disclose certain interests; and
• avoid conflict of interest.

Duty to act in good faith and for a proper purpose

Some of the significant duties imposed on directors, secretaries, other officers and employees of companies are set out in Part 2D.1 of the Corporations Act 2001 . Other duties are imposed in other sections of the Act and at common law.

Section 181 of the Corporations Act 2001 (external link) imposes a civil obligation on directors, secretaries and other officers of a corporation to exercise their powers and discharge their duties in good faith, in the best interests of the corporation and for a proper purpose. For example, use by the directors of their powers to benefit sectional interests, rather than the corporation as a whole, or to benefit some third party or their own interests will be considered to be a breach of this duty, as such a use of power is not for the promotion of the proper purposes of the corporation.

Under section 184 (1) of the Corporations Act 2001 (external link) a breach of this duty will be a criminal offence if the breach arises because the director or other officer of the corporation was reckless or intentionally dishonest.

Duty to act with care and diligence

Section 180 of the Corporations Act 2001 (external link) provides that a director, secretary or executive officer must at all times exercise a reasonable degree of care and diligence in the exercise of his or her powers and in the discharge of his or her duties. 'Reasonable' in this sense means the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances. Directors do not satisfy the required levels of care, skill and diligence by delegating to colleagues or subordinates in the company and paying no further attention. At a minimum, they must take an active interest in the company's affairs and obtain a general understanding of the company's business. They must pursue anything untoward that comes to their attention.

Various factors may be taken into account to assist the court and officers in determining whether the required standard of care and diligence has been satisfied. A useful checklist is:

• the information the officer acquired and what enquiries the officer made, about the corporation;
• the frequency of attendance at Board meetings and the extent to which the director exercised an active discretion; and
• the steps taken by the officer to:
  • ensure that the corporation made arrangements and gave effect to those arrangements;
  • ensure that people who prepared reports, or gave advice or opinions, on which officers or employees of the corporation relied were honest, competent and reliable, and were in other respects such as to inspire confidence in their reports, advice or opinions;
  • monitor and ensure compliance with the law, and with the corporation's constitution, by the corporation, its officers and employees;
  • ensure that persons who take part in the corporation's management do whatever is necessary to avoid conflicts of interest; and
  • ensure that where decisions are made by persons on the corporation/s behalf, those persons had adequate information about the subject matter of the decisions.

Duty to avoid improper use of information

Section 183 of the Corporations Act 2001 (external link) provides that a person who obtains information because they are or have been a director or other officer or employee of a corporation must not improperly use that information to gain an advantage for themselves or someone else or cause detriment to the corporation. This duty is of particular significance where the director has interests in the industry to which the Board relates.

Under s184 (3) of the Corporations Act 2001 (external link) directors, other officers and employees of corporations may also commit a criminal offence where information is used improperly and dishonestly.

Duty to avoid improper use of position

Section 182 of the Corporations Act 2001 (external link) prohibits a director, secretary, executive officer or employee from making improper use of his or her position to gain an advantage for himself or herself or for any other person or to cause detriment to the company. This obligation is of particular relevance for directors who have been appointed to represent particular interests on a Government Board such as Government officials or union officials.

Essentially, such directors are required to keep information which they receive as a director of the corporation (in particular Board papers) strictly confidential. They are not entitled to pass confidential information concerning the corporation to those who they represent, or to associates in the Government or their union or to any outside party.

Section 184(2) of the Corporations Act 2001 (external link) contains criminal offences for directors, other officers or employees of a corporation who use their position dishonestly.

Duty to disclose certain interests

Section 191 of the Corporations Act 2001 (external link) requires a director of a company who has a material interest in a matter that relates to the affairs of the company to give the other directors notice of the interest. The notice must include details of the nature and extent of the interest and be given at the directors' meeting as soon as practicable after the director becomes aware of their interest in the matter. A common example of a material interest is a director who has a personal interest in a contract that the corporation is to enter.

Duty to avoid conflict of interest

A director is obliged not to allow a conflict to arise between his or her interests and those of the corporation on whose board the director serves.

Conflicts may arise in a variety of ways. For example, in the case of Government officials, as a result of holding an official position which carries responsibility for some aspect of the operation or affairs of the corporation, or over policy which affects the corporation. It may also occur as a result of being on the Board of another corporation or being an employee of or consultant to another corporation having either dealings with the corporation or an interest in its activities. In such circumstances, the director who has a conflict must:

• declare the nature of the conflict to the board of directors;
• not have access to information of the corporation in relation to the matter in which he or she has the conflict;
• absent himself or herself from all meetings of the corporation at which the matter he or she has, or may have, a conflict is discussed;
• absent himself or herself from all meetings of the Board at which any matter in relation to which he or she has, or may have, a conflict as a director of the corporation is discussed;
• not seek, directly or indirectly, to influence the outcome of any deliberations by the corporation or any of its officers in relation to any matter to which he or she may have a conflict;
• not participate in any way in the decisions of the corporation concerning matters involving the other organisation which the director represents;
• not participate in any way in the decisions of the Board where those matters affect, or could affect, the corporation; and
• disclose interests in contracts with the corporation and potential conflicts through offices or property held.

Under the Corporations Act 2001 (external link), unless the other directors otherwise resolve, a director of a corporation must not vote or be present at a Board meeting in relation to a matter in which he or she has a material personal interest.

Relevance should also be had to section 995 of the Corporations Act 2001 (external link) which deals with misleading and deceptive conduct.

Penalties

Breach of statutory duties draws penalties under the Corporations Act 2001 (external link) which range up to $220,000 . Under both the common law and the Corporations Act 2001 (external link), officers may also be required to pay compensation or to account for profits. In some cases directors may also be disqualified from office.

Last reviewed: 17 July, 2009

Last updated: 22 July, 2009

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